You want to buy a house, condo or vacation home but you have some credit card debt. This is not uncommon and most people have some form of debt either in student loans, car loans or credit cards.
There are three strategies that you can use in order to manage your debt better and save up for a down payment.
#1. Consolidate your cards
If you have 10 different cards each with different balances here or there you might want to consolidate into one or two larger credit cards but leave the other ones open so that you have a larger amount of available credit. Several credit cards will allow you to transfer balances with 0% interest for up to 18 months or even longer. The reason you want to do that is that it will help you with the minimum monthly payments and show lenders that you don’t have as much going out every month in debt payments. You can always prepay each month in order to lower those debts faster but by combining multiple credit cards into one or two larger credit cards with one or two payments, it will be less money going out and more money going towards your debt.
[Read more: Using Equity in a Condo for a Larger Purchase Later]
#2. Spread out your debt.
As we just talked about, the monthly payments going out in credit card payment each month is a critical part of applying for a home loan. If you have $25 here, $50 there and $100 over here in minimum payments going out, that $175 all adds up to the debt you have going out from your income each month. If you have one large credit card you may actually want to spread that out among two credit cards having lower amounts each month and one large payment. It really depends on how many credit cards you have, how much debt you have on each and what makes the most sense, either consolidating or spreading it out.
#3. Paying off the smaller ones first.
If you have a credit card with a $25 balance or even less than $100, simply pay those off every month increasing your credit score and report. Higher rate credit cards are always good to pay off first as you won’t have as much an interest going out each month. The idea is to pick the cards with the higher monthly payment in order to prioritize and maximize your buying potential. A mortgage officer can help you organize all of your debts, credit cards and loans and find the best strategy to get you the right loan, the right down payment at the right time.
The Snowball Effect
Financing guru Dave Ramsey called the “snowball effect”. Let’s say you have five credit cards and the lowest balance is $150 with a minimum payment of $25 a month. Find out how much you could be paying on that small that each month and then add that to the next largest debt until it is paid off. For instance, if you can pay at least $50 a month on that $150 balance, you should have that paid off in about three months. From there, take that $50 and apply it towards the next highest balance. Let’s say, the next highest balance is a $700 balance. If the minimum payment is $100, you can pay $100 plus the $50 from the previous balance, paying that off in $150 increments until it is paid off. From there, you can take that $150 and apply it to the minimum balance of the next highest card. Perhaps your next card has a $2000 balance with a $200 minimum payment. You now would be making a $350 payment towards that $2000 balance, paying it off even more.
We are assuming that you’re still making the minimum monthly payments on all of the credit cards but once you have a card paid off you apply that minimum payment to the next highest balance and so forth. This snowball effect will get all of the cards paid off a lot quicker. Paying more than the minimum amount rapidly decreases the principle payment owed on the card.
We want you to be a homeowner whether it’s a second home, vacation property, condominium or single-family house. However, paying down your credit card debt and lowering your debt to income ratio is one of the first steps to having a low interest rate and a more comfortable mortgage payment each month. Give us a call today for more information on condos in Panama City Beach or to find out how much home you can afford and get connected with a local lender.